Atif Mian is Professor of Economics, Public Policy, and Finance at Princeton University, Director of the Julis-Rabinowitz Center for Public Policy and Finance at the Woodrow Wilson School, and co-author of House of Debt.

The wording "a rapid influx of capital into the financial system often triggers an expansion in credit supply" is very misleading at it suggests banks need to somehow attract deposits before they can lend these out. In practice, the causality runs the other way around, with banks expanding credit (in domestic currency) which can then service the appetite for "savings" (in foreign currency) of countries then run a current account surplus.

A detailed description of this mechanism, and relevant constraints to credit / money creation, can be found at the Bank of England (https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy), the Bundesbank (https://www.bundesbank.de/Redaktion/EN/Topics/2017/2017_04_25_how_money_is_created.html) or in this paper by Kumhof and Benes https://www.bankofengland.co.uk/working-paper/2015/banks-are-not-intermediaries-of-loanable-funds-and-why-this-matters

A “global savings glut”, helped by a greater concentration of wealth at the very top, can surely put downward pressure on interest rates and therefore affect credit demand as well as incentivize banks to engage in imprudent lending, knowing that the resulting credit can be securitized and sold off with a profit. Therefore, the end of Bretton-Woods (and corresponding capital controls) and the loosening of regulatory standards in the 1980s may be much better candidates to look into in order to explain what enabled credit-supply expansions further down the road.

Total financial debt increased by 300% while households' incomes increased by 85% between 1996 and 2009. Debt outpaces income, debt becomes non-payable -- it's an old story. Household debt in 1996 = 65% of GDP, and in 2009 = 98%. Outstanding debt of domestic financial sector increased by 4 times (by 300%), from $4.5 trillion to $18 trillion, 1996 to 2009, 13 years -- from 56% of national income to 121%. (From Fed's FRED graphs.) Home equity loans increased from $104 billion in Jan 2000 to $611 billion in May 20, 2009. (See Fed's FRED graphs, Revolving Home Equity Loans.) These loans increased from 1% of "gross national income" to 4.2%. Total household debt increased from $7 trillion to $14 trillion. Personal Savings Rate dropped from 11% to 12% between 1960 to 1985, to fall to 4% in 2000 and 3% in 2009. Banks off-loaded loans to "securitized" "Collateralized Debt Obligations". This article is old history. The even sorrier part of the story is the 15 million jobs lost between 2008 and 2010, 8.75 million were permanent. The 5 million homes lost to foreclosure and default. And the slowest recovery in modern history. Still sorrier is the doubling of value of private household net worth between 2009 and 2018, an increase from $48 trillion to $96 trillion (an increase of 71% adjusting for inflation), mostly benefitting the wealthiest. The U.S. annual budget in 2018 spends $4.4 trillion in comparison to the $96 trillion in private savings. Federal debt increases from 64% of GDP in 2007 to 103% in 2017 (up $10 trillion, or an increase of 56%). The aftermath of the Financial Crisis is the explosion of net worth which enriching the wealthiest. The middle earners were hurt most, the wealthiest gained the most. This appears to be unjust -- those whose excesses caused the crisis are rewarded after the crisis. It's time to tax wealth. My blog is http://benL8.blogspot.com, Economics Without Greed.

I'm sorry, why are these findings treated like a revelation? Is the economics profession really so backwards that it's unable to recognize a few basic conclusions like that "credit-supply expansions, rather than technology or permanent income shocks, are the key drivers of economic activity"?

Yes, that is why back casts are so much more accurate than forecasts. Who would ever have though that the money supply and the availability of credit, i.e., interest rates, had anything to do with current consumption and investment? And one of the co-authors is at Chicago. What next? Oh, yes, public debt.

As well, the article seems to ignore foreign sources of saving in non-restricted capital account transaction. Taylor has been consistently wrong about inflation, so it is not surprising that he is a source for the appraisal.

Growth based on Debt and Debt Issuance, as we have seen with this long term Bubble Market rise in assets, is foolish, non sustainable, and financially dangerous. The Central Banks and Politicians and so called "Experts" are all large contributors to this Debt Bubble and False Growth. In the end the house of cards built on Debt shall collapse and the Central Banks will have no real tools left except let the system collapse and then hopefully soundly rebuild it, which should have been done in 2008/9 vs trying to pump as much money into the system, flood the MKTS, with the hope high asset prices will solve the problem. Just too much unproductive Debt.

That savings glut was in large part driven by the rise in wealth that followed the end of high marginal tax rates in the the US and else where. As the after tax incomes of corporate executives and others sky rocketed in the 1990's and 2000's there was a mad search for where to place this money: hedge funds, private equity, dot.com's then government debt resulting in falling interest rates then mortgage backed securities, then more government debt again giving us record high bond prices. Now with the new tax cut there will be even higher savings rates and yet more money looking for a safe home and more ordinary households turning to debt to prop up their life style.

The authors are certainly right that using monetary policy to stimulate the economy has its problems. Low interest rates mostly stimulate only the housing sector directly. Getting people back to work in that sector then gives them the money to stimulate other sectors. As the authors are saying, an over-stimulated housing sector can then collapse, creating another recession.

To me, the obvious response is to put a heavier emphasis on fiscal stimulus to fight recessions, which acts more broadly. This worked very well in China in the last recession. China had a stimulus plan about 15% of GDP, compared to other countries with around 2%. It quickly blasted itself out of that recession that way.

"First, credit-supply expansions, rather than technology or permanent income shocks, are the key drivers of economic activity. This is a controversial idea. Most models attribute macroeconomic fluctuations to real factors such as productivity shocks."

You had better be very, very careful about saying things like that. You might get burned at the stake as adherents of the Keynesian heresy. If you keep thinking like that, you might even re-discover Keynesian economics.

Indeed most modelling presuppose an equation of value historical accumulated debt and the Net Present Value of expected future profits (=equity) . this means denieing the problem by assumption. Incredible that someone can still defend that moddeling away of real world problems.

It is great that more economists now look into the impact of the financial sector and credit in the real economy. The key question that still too few are trying to answer is the following: if credit expansions lead to future instability, why so we still rely on credit as the main (over 90%) source of money creation? Is it not time to challenge this assumption, given we definitely need to grow the money supply to grow the economy?

The article - and for sure that is a failure of it - does not consider any macroeconomic surplus credit or contrary . It is about the perversity that the banking system support the inequality by lending the surplus savings of the rich to the poor. And of course that collapses as the poor can't repay after the "grace period" that was given to lure them in debts. The analysis is on a kind of meso-leverl. insufficient for the dynamics of the whole economy, but a mechanism nevertheless.

New Comment

Pin comment to this paragraph

After posting your comment, you’ll have a ten-minute window to make any edits. Please note that we moderate comments to ensure the conversation remains topically relevant. We appreciate well-informed comments and welcome your criticism and insight. Please be civil and avoid name-calling and ad hominem remarks.

Log in/Register

Please log in or register to continue. Registration is free and requires only your email address.

Log in

Register

Emailrequired

PasswordrequiredRemember me?

Please enter your email address and click on the reset-password button. If your email exists in our system, we'll send you an email with a link to reset your password. Please note that the link will expire twenty-four hours after the email is sent. If you can't find this email, please check your spam folder.